Crypto & Commodities: The Arc Seems to Rhyme More Everyday…

Lessons from 25 years in the commodities market…

By   Russell Newton 19th August 2019

Before discovering cryptocurrencies in 2013, my partner Daniel Masters and I were involved in commodity trading for almost three decades.

At that time, one of the features of bitcoin that appealed to us was the limited issuance, as only 21 million bitcoin will ever be issued. This made it feel quite similar to gold or silver.

The longer I am in this space, the more I see similar patterns emerge.

First: One of the successful themes we employed in our Global Advisors Commodity Investment Fund during the period 2002–2007 was the “Three Ds” of Demand, Depletion and the Dollar. In some ways, these same elements are present in the digital asset ecosystem today:

  1. Demand in the form of increased utility for digital assets beyond financial speculation —* as we’ll highlight later, institutional interest, while increasing in our experience, is untethered from demand for the underlying
  2. Depletion in the form of the periodic halving of bitcoin’s block mining reward.
  3. The Dollar in the form of reduced confidence in fiat currencies following the 2008 Global Financial Crisis, use of policies such as Quantitative Easing, and the current mini-currency war between the U.S. & China.

So at the very least, we are getting a similar setup here…

Second: Between the mid-1990s and the cycle peak in 2008, commodities developed from a market of professionals & industry participants into a more widely recognized asset class. By the end of 2008 there was more than $250 billion in commodity index funds (up from $20 billion in 2002) and the gross market value of commodity derivatives had risen by a factor of 25 times to $2.13 trillion between June 2003 and June 2008.

This expansion was obviously assisted by the advent of a broader range of low-friction, non-physical exchange-traded products, as no one wanted to buy actual barrels of oil and take delivery, etc, and rather preferred to speculate on the price of the underlying via synthetic instruments. The growth of the gold market and oil market, as evidenced below, was primarily driven by futures and products that were independent of the underlying physical asset in every way except for price.

Note for a moment here that when I am talking about institutional money flowing into the commodities space, reducing friction was an important driver in facilitating market growth. This growth happened via synthetic, or non-physical, means. At first slowly, then rapidly.

There is a similar tension today, behind the idea of “institutional capital” entering the digital asset market. It is highly unlikely that a large institutional buyer will want to buy and take digital settlement of bitcoin. It is much more likely that these institutional investors will take synthetic exposure that provides them with the price volatility of digital assets without all of the underlying execution risk and operational risk.

For years, there has been a quiet flow into the underlying asset (in this case bitcoin) and a slow pick-up as other lower friction ways to invest (such as futures and exchange-traded products) have hit the market. I let you infer from history what would follow, cycle-wise.

Third: I’ve definitely heard the “blockchain, not bitcoin” line before…or said differently, I’ve seen investors conflate exposure types early in an asset class before.

Back in the early 2000s many institutional investors simply weren’t convinced they needed to access commodities themselves, with commodity exposure available through investment in mining & oil equities. My response to this is yes, and no.

Let’s take the example of a company like BP — they are exposed to oil & gas prices, yes. But they are also exposed to refinery margins, operational risks as the Deepwater Horizon disaster demonstrated, and environmental policies and new regulation that impact demand, so no. In this case, for an investor wanting exposure to oil prices, buying BP is not the same as buying oil prices. They are buying other risks and other potential upside as well.

Likewise, so-called “Junior Mining” stocks might feel like options on the price of the commodity, but — even having made a discovery — it can take many years to obtain the necessary permits & build a mine. For the uninitiated, a junior mining company is an exploration company in search of new deposits of gold, silver, uranium or other precious metals. Many junior miners are penny stocks, and highly speculative, high risk investments that investors hope to buy into before a company hits the mother lode.

As a consequence, equity indices like OSX (PHLX Oil Services Sector) or GDM (NYSE Arca Gold Miners) do track oil & gold prices, but imperfectly. The ebb and flow in the relationship between the value of the equity & the underlying asset is driven by many factors.

We see a similar, bi-polar investing (and liquidity) spectrum emerging in the digital asset space.

Certainly, with the lion’s share of liquidity and name recognition, bitcoin has tended to lead the market and be the ‘flagship investment’ if you will. Though during much of bitcoin’s 2017 rally — the ‘pro money’ was often looking elsewhere as the ICO phenomenon fuelled buying of ETH.

Source: Aug 2019

At the other end of the liquidity spectrum we have the long tail of “alt coins” which includes more than a few scams as reported in the press and, in our opinion, very optimistic “business plans”, but also covers some very interesting and innovative technologies.

These tokens behave more like the equity market’s junior mining or exploration stocks: a brief surge of excitement on some news which may inflate the price, but until there’s some real evidence of traction, or in my ‘Three Ds,’ demand (Minimum Viable Product delivered, or ideally some people actually using the technology) nothing much happens. My partner Meltem Demirors further expanded token investing on using onshore shale gas development as an analogy. Did I mention we are commodities people?

Gartner Group describes this period of their Hype Cycle as the “Trough of Disillusionment.” Without question, 2018 was a Trough of Disillusionment for digital assets. Many alt-coins were down more than 90% from late 2017 / early 2018 all-time highs (some still are see here, sort by % down from ATH”), with bitcoin also falling more than 80% from a high of over $19,000 in December 2017 to below $3,500 in December 2018.

But, I think the real truth is that at some point in the (likely not-too-distant ) future, nobody will care if a technology is “powered by blockchain” any more than anyone cares today that the internet is powered by TCP/IP & HTTPS.

When the hype fades, consumers and businesses only care that stuff works.And that is the most important lesson of all.

Crypto projects — whether at the protocol layer via some token or the application layer via a product or service — need to deploy technology that works and that people want to use because it’s better than what’s already available. We’re starting to see some of that tech finally emerge in 2019 and we expect it to accelerate into 2020 and beyond.

At CoinShares, we are believers in this shift from legacy capital markets to digitized, blockchain-based financial markets. This is history continuing to do what it has done before, and as my partner Ryan Radloff has pointed out prior, this is a natural evolution, not revolution.

CoinShares Research 2019. Originally appeared here.

We fully intend to participate in bringing about this paradigm shift being active as an investor, product creator, issuer, asset manager, and industry innovator.

We have shifted from asking “if” this evolution is coming, and have started analyzing “when, where, and how” this will happen, and how we can best participate in this value creation.

To that end, we are excited about the opportunities ahead, and fully aware that the three D’s — demand, depletion, and the dollar — which served as our compass before, continue to guide our direction now.

*see for reference: What Explains the Growth in Commodity Derivatives? Parantap Basu and William T. Gavin Federal Reserve Bank of St. Louis Review, January/February 2011, 93(1), pp. 37–48


Please note that this Blog Post is provided on the basis that the recipient accepts the following conditions relating to the provision of the same (including on behalf of their respective organisation).

This Blog Post does not contain or purport to be, financial promotion(s) of any kind.

Digital assets and related technologies can be extremely complicated. The digital sector has spawned concepts and nomenclature much of which is novel and can be difficult for even technically savvy individuals to thoroughly comprehend. The sector also evolves rapidly. With increasing media attention on digital assets and related technologies, many of the concepts associated therewith (and the terms used to encapsulate them) are more likely to be encountered outside of the digital space. Although a term may become relatively well-known and in a relatively short timeframe, there is a danger that misunderstandings and misconceptions can take root relating to precisely what the concept behind the given term is.

The purpose of this Blog Post is to provide objective, educational and interesting commentary. This Blog Post is not directed at any particular person or group of persons. Although produced with reasonable care and skill, no representation should be taken as having been given that this Blog Post is an exhaustive analysis of all of the considerations which its subject matter may give rise to. This Blog Post fairly represents the opinions and sentiments of its author at the date of publishing but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and the blog post may not necessarily be updated to reflect the same. The opinions expressed in this blog post are the opinions of CoinShares. The blog post content is for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.

Nothing within this Blog Post constitutes investment, legal, tax or other advice. This Blog Post should not be used as the basis for any investment decision(s) which a reader thereof may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances.

© 2019 CoinShares. All rights reserved.


Sign up for our monthly newsletter


Our latest insights & research. Never spam.

Terms of Entry (Use)

Users must accept these terms before they can proceed to access this website. By proceeding to access the information contained, referred or linked to on this website, users shall be deemed to have represented and warranted that the applicable laws and regulations of their relevant jurisdiction allow them to do so.

UK Investors - Self Certified Sophisticated Investor Disclosure

The content of this promotion may not have been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested. This promotion is exempt from the general restriction (in section 21 of the Financial Services and Markets Act 2000) on the communication of invitations or inducements to engage in investment activity on the ground that it is made to a self-certified sophisticated investor. A Self-Certified Sophisticated Investor is an individual who has signed within the period of twelve months ending with the day on which the communication is made, a statement confirming that at least one of the following applies:

  • The investor is a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date of signing the statement;
  • The investor has made more than one investment in an unlisted company in the two years prior to the date of signing the statement;
  • The investor is working, or has worked in the two years prior to the date of signing the statement, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
  • The investor is currently, or has been in the two years prior to the date of signing the statement, a director of a company with an annual turnover of at least £1 million.

I declare that I am a self-certified sophisticated investor for the purposes of the Financial Services and Markets Act (Financial Promotion) Order 2005. I understand that this means:

  • I can receive financial promotions that may not have been approved by a person authorised by the Financial Conduct Authority;
  • The content of such financial promotions may not conform too rules issued by the Financial Conduct Authority;
  • By signing this statement I may lose significant rights;
  • I may have no right to complain to either of the following —
    1. The Financial Conduct Authority; or
    2. The Financial Ombudsman Scheme;
  • I may have no right to seek compensation from the Financial Services Compensation Scheme.

If, as a recipient of this promotion you are in any doubt about the investment to which the promotion relates you should consult an person authorised under the Financial Services and Markets Act 2000 specialising in advising on investments of the kind detailed in this promotion.

It should, in particular, be noted that the Tracking ETPs referenced on this website have not been, and will not be, registered under the Securities Act 1933, as amended of the United States (the "Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the United States and may include securities in bearer form that are subject to United States tax law requirements. Such Tracking ETPs may not be offered, sold or (in the case of bearer securities) delivered within the United States or to, or for the account or benefit of, US persons, except pursuant to offers and sales in an offshore transaction that occurs outside the United States in accordance with the applicable provisions of Rule 903 of Regulation S under the Securities Act or pursuant to another available exemption from the registration requirements under the Securities Act.